The U.S. stock market has shown strong gains this year, but that growth has been excessively concentrated in a handful of big tech corporations. The Standard & Poor's (S&P) 500 index is up more than 12% from the start of the year, but the so-called "Magnificent 7" — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — effectively drove the rally. In the market, the remaining 493 corporations excluding those seven, or the "S&P 493," are seen as revealing a very different reality of the U.S. economy.
On the 24th (local time), the Washington Post analyzed that the corporations included in the S&P 493 are mostly lower-tech and smaller in scale. Recently, these corporations have seen sales slowdowns and investment pullbacks at the same time. Mark Zandi, chief economist at Moody's Analytics, said, "A tailwind called artificial intelligence (AI) and headwinds of deglobalization and tariff are blowing simultaneously," and noted, "Sectors unrelated to AI are broadly on a downward trend."
The AI investment boom has inflated the valuations of a few tech corporations such as Nvidia, Microsoft and Meta, distorting the market. Nvidia has surged more than 1,000% over two years and is up 29% this year. Data analytics corporation Palantir, memory chipmaker Micron and data center cooling equipment corporation Vertiv have also posted big gains. In contrast, small and mid-cap stocks in the Russell 2000 index fell 4.5% over the same period, moving opposite to the S&P 500.
Experts point to tariff shocks and a high-interest-rate environment as reasons for small-cap underperformance. Small corporations are cited as lacking the capacity to absorb higher prices of imported raw materials and having less flexibility to shift supply chains to avoid tariffs. They also rely heavily on liability for working capital, making them vulnerable to rate swings. For these reasons, investors have recently been pulling money from small caps and flocking to large caps that benefit from global AI demand.
Some also argue that as the entire S&P 500 tilts sharply toward big tech, the index's diversification function has effectively disappeared. Torsten Slok, chief economist at private equity firm Apollo, said, "One-third of the index is concentrated in seven corporations, making it effectively close to an 'AI index.'"
Fears of an AI bubble are also adding to market volatility. As some big tech names showed a mild pullback recently, bubble concerns resurfaced. Hedge fund manager Michael Burry criticized that "the AI industry is exaggerating its long-term profitability." In fact, the tech-heavy Nasdaq index has fallen 7% from last month's peak.
Experts also raise the possibility that a big tech correction could spread to the broader U.S. economy. Recent growth has relied heavily on a "wealth effect" driven by increased spending by high-income earners. They warn that if big tech shares plunge, consumers' spending capacity could shrink quickly, increasing pressure for an economic slowdown.
Slok said, "Consumers and corporations alike are in a very vulnerable position if the AI narrative wobbles." The U.S. stock market has outwardly shown solid gains this year, but beneath the surface, structural polarization between "AI beneficiary corporations and the rest" is deepening.